After- and pre-market trading, also called extended hours trading, takes place outside regular trading hours of 9:30 a.m. to 4 p.m., Eastern Time, in the United States. It allows traders to react quickly to the news that is reported when the market is closed. Generally, after- or pre-market prices are a good indication of where stock prices will open for regular trading, but the correlation is not always exact or straightforward.
TL;DR (Too Long; Didn't Read)
Price changes during extended hours trading can happen due to how to traders react to news developments. These changes can give an indication of where the prices will open when regular trading begins.
News Impact on Prices
Stock prices often change in reaction to news about government economic statistics, company earnings reports and press releases or major political developments. Prices may rise or fall depending on the perceived impact of the news. If the news is reported outside regular trading hours, stock prices would change as soon as the market opens for trading again.
Instant Market Reaction
Market participants may try to beat the crowd in reaction to the news as soon as possible by trading outside regular trading hours. For example: If a company releases earnings right after the market closes at 4 p.m., traders may react right away by trading the stock after-hours. If there is a significant overseas development overnight, while the U.S. market is closed, traders may react to it in pre-market trading the following day.
Impact on Opening Prices
Not all market participants take part in extended-hours trading, but most monitor the news and check extended hours trading results for an indication of where prices might open during regular trading. Their anticipation and trading plans will impact the opening prices, which will generally open in the direction of extended hours’ prices.
But where they open is hard to predict with any accuracy and depends on several factors. When the regular market opens, the supply of stock available for trading is much greater than during extended hours, and prices move freely as opposed to in limited ways, as required during extended hours trading. The greater volume and liquidity may either exacerbate or smooth out the price moves recorded during extended hours trading.
Extended Hours Trading Volume
It is important to view extended hours trading volume when assessing the impact on opening prices. Extended hours price changes may be the result of a few nervous traders overreacting to a minor development or a skillful manipulator making a few trades to manipulate regular market prices. Sometimes a few trades that took place during regular hours get reported out of order after markets close. In such cases, extended hours prices won’t have an impact on opening prices.
Based in San Diego, Slav Fedorov started writing for online publications in 2007, specializing in stock trading. He has worked in financial services for more than 20 years, serving as a banker, financial planner and stockbroker. Now working as a professional trader, Fedorov is also the founder of a stock-picking company.